Crisis, costs and opportunity

The Consulting firm Kearney released its 12th edition of the “European Retail Banking Radar“, tracking the performance and market landscape of the industry across 22 European countries. Regarding the cost-to-income ratio, and despite efforts done over the past five years on the cost side, the report states that banks will need to reduce costs by €35 to 45 billion over the next three to five years as the primary lever to increase profitability.

Kearney´s report estimates that 2021 will be another challenging year for the European banking sector in which most of banks won´t increase significantly their profitability for different reasons: provisions and impairments in times of crisis, different vaccination rollouts, government support programs and speed and magnitude of economic recovery.

In this context the report points out the following:

• Cost reduction will remain on the agenda. Cost-reduction programs over the past years have not much improved cost-to-income ratios (CIR). According to the report, “banks will need to reduce costs by €35 to 45 billion over the next 3 to five years as the primary lever to increase profitability”:

‑ The average CIR in 2008 was 62% with a marginal increase to 63% in 2020.
‑ Over the past five years, headcount has been reduced by 9% and branch network by 19%, but operating cost improvement has not been much as it has been offset by IT investment and salary increases. The top percentile of European banks improved their CIR 5p.p from 65% to 60%, while the bottom percentile increased it CIR to 68% from 53%.

• However, the consulting firm expects “the European banking sector will emerge stronger and better in the wake of COVID-19”:

‑ The pandemic has been an opportunity to regain the trust lost in the last crisis, as “retail banks repositioned themselves as partners to individuals and small businesses, helping them during the several waves of lockdown” (i.e. through their participation in the distribution of public guaranteed loans or private moratoria’s schemes). Now they have the opportunity to become the engine of the recovery.